The Wealth Effect, and Farm Impact on the US Economy

by Jim Lane (Biofuels Digest) Though representing just 1.3% of the US GDP, if the farm sector has a major impact on US economic health, it may tie back to what economists call “the wealth effect”. In today’s Digest, we look at “the wealth effect” and why political uncertainty over the Renewable Fuel Standard might lead to economic uncertainty, and impact on the 2016 Iowa Caucuses, and beyond.

... (W)e are looking in more detail at what we have termed “The Iowa Renaissance”, a substantial lift in the farm state’s prosperity in the past 15 years, and a complete turnaround since the days of Farm Aid and the 1980s farm crisis.

Political uncertainty over the US Renewable Fuel Standard has been generally attributed by Iowa’s leaders for a downturn in sector confidence. In a report appearing in the Des Moines Register, Iowa State economist Chad Hart warned of as much as a $2.6 billion drop in farm income in 2014, from 2013, when the numbers are totaled up. Overall, US farmers are told to expect a 23 percent drop in income.

Last August John Deere announced it would lay off 1,000 workers, as uncertainty works its way into expectations around corn prices — with the company saying it had a 9% downturn in sales in 2014 and was expecting a drop of as much as 20 percent in 2015

And Iowa Governor Terry Branstad said that farm values had already dropped an average of 15%, and Steve Bruere, president of Peoples Co., a Clive farmland brokerage and management company, told the Register that he views “commodity prices more closely supporting 2008 farmland values, about 50 percent lower than today’s values.”

Even if US ethanol and biodiesel demand stays static, let’s look at the impact of a 50 percent drop in farm land values on the Iowa economy. According to Case et al, the impact appears to be a little more muted on the downside, about 80% of the impact seen from rising real estate values. Still, that could translate into a hit to the Iowa economy of $6.15-$9.23 billion just from the “wealth effect”. Add to that a $2 billion loss in farm incomes, or so, and that could be a downturn of $8-$11 billion. That measures out to a 6-9 percent drop in the state GDP.

Which is to say, Iowa’s prosperity might be in the balance owing in great measure to the Obama Administration’s oversight of the RFS, in addition to pressure brought to bear by efforts to overturn renewable energy legislation that generally have come from the far right.

... A success story that may be in jeopardy owing to federal indecisiveness on enforcing the energy laws. READ MORE and MORE

Excerpts from interview with Governor Terry Brandstad: Gov. Branstad: For example, there’s this idea that the RFS impacts the price of food. Now we’ve seen corn drop from $8 a bushel to $4, and now it’s dropped even more and is down near $3.50. And the price of food has gone up, not down.

A few years back Dan Lundgren was running for Governor of California and I told him, this could be a great thing for California, the RFS and the move toward renewable fuels. But the oil companies have huge influence, and environmentalists can have the problem of a narrow focus. They watched as the groundwater got polluted with MTBE, and here’s this great additive that is clean and they could have had it all along, but they still have trouble with renewable fuels.

Gov. Branstad: I think the one I am most disappointed in is President Obama. He was a farm state senator from Illinois and was a very strong advocate for renewable fuels, and the farm sector, when he was running in 2008. He picked up a lot of support in the Midwest. But since then he has turned his back on us.

Oil has been subsidized for a hundred years, and now we have a chance to replace a lot of that oil with renewable resources. They don’t need a subsidy, but investors need to know that there is going to be a market.

The Digest: But you remain bullish on growth for the Iowa economy and renewable fuels, if the policies are done right?

Gov. Branstad: Absolutely. Already we have reached 10 percent ethanol levels. Look at the impact for people, jobs and energy security. But the sweet spot is really 30 percent, that’s where you get the best balance of mileage and cost. READ MORE